MacroResearchBoard

Oil Demand Is Recovering, But Supply Will Remain The Swing Factor – November 30, 2020

A just-published report examined the outlook for oil prices. Demand is indeed firming after imploding earlier this year. However, the more dominant factor affecting oil prices will be the trend in supply, and here the outlook points to limited upside in oil prices.

Just as speculators are betting that the market will be undersupplied in the back half of 2021, both U.S. shale producers and the OPEC+ group are primed to lift output in 2021, perhaps significantly. The recovery in U.S. shale well completions and production has already begun, and previously drilled wells can be profitably completed at approximately US$35/bbl, which is well below the current WTI 24-month forward price. Thus, U.S. output is likely to surprise on the upside. Meanwhile, the pressure from a growing list of OPEC+ members to lift output is steadily intensifying.

Bottom line: Oil prices will remain broadly range-bound, and likely to underperform other commodities, given that the supply overhang should increase in 2021.